Moses v. Innoprise Software Inc. et al
Filing
102
ORDER by Judge Elizabeth D Laporte granting in part and denying in part 81 Motion to Dismiss; denying 82 Motion for Sanctions (knmS, COURT STAFF) (Filed on 2/21/2014)
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IN THE UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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MARK MOSES,
Plaintiff,
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United States District Court
For the Northern District of California
ORDER GRANTING IN PART MOTION
TO DISMISS AND DENYING MOTION
FOR SANCTIONS
v.
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No. C -12-05271 EDL
INNOPRISE SOFTWARE, et al.,
Defendants.
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/
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Before the Court are Defendants Harris Systems USA, Inc., and N. Harris Computer
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Corporation’s (“the Harris Defendants”) Motion to Dismiss Plaintiff’s Second Amended Complaint
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(Dkt. 81) and Motion for Sanctions (Dkt. 82). For the reasons stated at the hearing and set forth
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below, the Court grants in part the Harris Defendants’ motion to dismiss and denies their motion for
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sanctions. The Court dismisses Plaintiff’s claim for breach of employment agreement without leave
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to amend as to that claim and as to successor liability with respect to any other claim. Plaintiff only
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has limited claims against the Harris Defendants in this case for quantum meruit and fraud. (See
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Dkt. 77.) The Court will not, however, require Plaintiff to file another amended complaint at this
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time. The Court declines to award sanctions.
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I.
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Background
The background for this case is set forth in the Court’s prior orders dismissing Plaintiff’s
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original and first amended complaints. (Dkt. 53, 77.) The gravamen of Plaintiff’s case is that
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Defendants Innoprise Software, Inc., (“Innoprise”) and Dennis Harward, its principal, owe Plaintiff
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approximately $71,500 in back pay. On July 2, 2012, Plaintiff filed a complaint in state court against
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Innoprise, Harward Investments, Inc., Dennis Harward, Ann Harward, the Harris Defendants, and
MS Govern Co. The complaint contained claims for: (1) breach of employment agreement; (2)
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breach of contract; (3) quantum meruit; (4) fraud; and (5) transfer in fraud of creditor. Plaintiff
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alleged generally that Defendants owe him back pay for work he performed for Innoprise prior to
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being terminated when the Harris Defendants purchased Innoprise’s assets. Plaintiff sought $84,000
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in salary and statutory damages. Defendants timely removed the case to this Court.
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The Court dismissed Plaintiff’s complaint with leave to amend in part on July 26, 2013. The
Court dismissed Plaintiffs’ breach of employment agreement, breach of contract, and quantum
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meruit claims against the Harris Defendants without leave to amend and dismissed Plaintiff’s fraud
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and fraudulent transfer claims against them with leave to amend. Plaintiff filed a first amended
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complaint on August 9, 2013, which continued to allege breach of employment agreement, breach of
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United States District Court
For the Northern District of California
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contract, quantum meruit, fraud, and fraudulent transfer against the Harris Defendants. Unlike in the
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original complaint, Plaintiff alleged in the first amended complaint (“FAC”) that the Harris
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Defendants were liable as successors in interest to Innoprise. (FAC ¶¶ 47-48, 54, Dkt. 54.) Plaintiff
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also alleged new facts regarding quantum meruit and fraud, despite the Court having dismissed the
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former against the Harris Defendants with prejudice. (FAC ¶ 67.)
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The Court dismissed the FAC with leave to amend in part on November 13, 2013. (Dkt 77.)
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Among other things, the Court stated that “[t]o the extent that the FAC contains contract claims
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against the Harris Defendants, the Court dismisses these claims without leave to amend.” (Id. at 1.)
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The Court also dismissed the fraudulent transfer claim against the Harris Defendants without leave
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to amend. The Court further dismissed “any claims against the Harris Defendants brought under a
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successor liability theory with leave to amend.” (Id.)
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On December 6, 2013, Plaintiff filed a second amended complaint (“SAC”). (Dkt. 79.) The
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SAC largely repeats the allegations of the FAC and contains claims for breach of employment
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agreement under successor liability, quantum meruit, and fraud against the Harris Defendants. It is
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unclear from the face of the SAC whether it alleges breach of contract and fraudulent transfer
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against the Harris Defendants. The SAC also contains new allegations regarding Plaintiff’s alter ego
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theory with respect to the Harward Defendants (SAC ¶¶ 4, 9, 52 60, 102) and Defendants’ alleged
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scheme to defraud unsecured creditors such as Plaintiff (Id. ¶¶ 59-62.)
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Plaintiff also makes new allegations regarding his theory that the Harris Defendants are
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liable as successors in interest to Innoprise. (Id. ¶¶ 48, 49, 64.) Plaintiff alleges that after the Harris
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Defendants purchased Innoprise’s asserts, they operated as a “continuation of the business as
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previously operated as Innoprise” and changed only the name of the payee on contracts. (Id. ¶¶ 48,
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49, 64.) According to Plaintiff, the Harris Defendants issued a press release stating that “[t]he
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Innoprise software assets are being purchased by Harris, & the Innoprise employees will work for a
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newly formed subsidiary affiliated with Harris’ MS Govern local government business unit.
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Innoprise will continue to sell, develop, enhance, support and service the Innoprise flagship
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solutions.” (Id. ¶ 49.) Plaintiff also alleges that the Harris Defendants advertise for employees on
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the Internet as “Innoprise.” Further, Plaintiff alleges that Defendant Dennis Harward was an officer
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United States District Court
For the Northern District of California
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of the Harris Defendants as of the effective date of the asset transfer agreement between the Harris
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Defendants and Innoprise. (Id. ¶ 63)
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The Harris Defendants moved to dismiss the breach of employment agreement, breach of
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contract, and fraudulent transfer claims against them in the SAC on December 23, 2014. They
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argued that the Court already dismissed these claims against them without leave to amend and that
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Plaintiff cannot plausibly plead successor liability. The Harris Defendants also moved to dismiss
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Plaintiff’s fraud claim against them to the extent it contained allegations beyond the limited fraud
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claim that the Court allowed in its order on Plaintiff’s FAC. The Harris Defendants further
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requested that the Court order Plaintiff to re-plead the remaining claims against them. The Harris
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Defendants also moved for sanctions against Plaintiff on the ground that he violated the Court’s
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FAC order by realleging claims for breach of employment agreement, breach of contract, and
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fraudulent transfer in the SAC.
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Plaintiff did not meaningfully oppose the Harris Defendants’ motion to dismiss; rather he
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relied on his earlier opposition to the Harris Defendants’ prior motion to dismiss the FAC, which is
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not responsive to the Harris Defendants’ present arguments. Plaintiff opposed the Harris Defendants
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motion for sanctions. Plaintiff asserted that the SAC does not contain claims for breach of contract
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or fraudulent transfer and that the Court granted him leave to amend as to successor liability, which
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is the basis for his breach of employment agreement claim against the Harris Defendants. The Court
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held a hearing on the Harris Defendants’ motions on February 18, 2014.
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II.
Discussion
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A.
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A complaint will survive a motion to dismiss if it contains “sufficient factual matter . . . to
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‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678, (2009)
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(citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Dismissal under Rule 12(b)(6)
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may be based on the lack of a cognizable leal theory or on the absence of sufficient facts alleged
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under a cognizable theory. Johnson v. Riverside Healthcare Sys., 534 F.3d 1116, 1121 (9th Cir.
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2008). The reviewing court's “inquiry is limited to the allegations in the complaint, which are
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accepted as true and construed in the light most favorable to the plaintiff.” Lazy Y Ranch Ltd. v.
United States District Court
For the Northern District of California
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Standard of Review
Behrens, 546 F.3d 580, 588 (9th Cir. 2008).
A court need not, however, accept as true the complaint's “legal conclusions.” Iqbal, 556
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U.S. at 678. Conclusory allegations of law and unwarranted inferences are insufficient to defeat a
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motion to dismiss. Fields v. Legacy Health Sys., 413 F.3d 943, 950 n.5 (9th Cir. 2005). “While
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legal conclusions can provide the framework of a complaint, they must be supported by factual
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allegations.” Iqbal, 556 U.S. at 679. Thus, a reviewing court may begin “by identifying pleadings
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that, because they are no more than conclusions, are not entitled to the assumption of truth.” Id.
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Courts must then determine whether the factual allegations in the complaint “plausibly give
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rise to an entitlement of relief.” Id. Though the plausibility inquiry “is not akin to a probability
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requirement,” a complaint will not survive a motion to dismiss if its factual allegations “do not
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permit the court to infer more than the mere possibility of misconduct.” Id. at 678 (internal
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quotation marks omitted). Plaintiffs must “nudge[] their claims across the line from conceivable to
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plausible.” Twombly, 550 U.S. at 570.
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B.
Analysis
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Because Plaintiff acknowledges that the SAC does not contain claims for breach of contract
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or fraudulent transfer against the Harris Defendants, the Court need only address whether Plaintiff
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has adequately pled successor liability as to his claim for breach of employment agreement. “The
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general rule of successor nonliability provides that where a corporation purchases, or otherwise
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acquires by transfer, the assets of another corporation, the acquiring corporation does not assume the
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selling corporation’s debts and liabilities. “ Fisher v. Allis-Chalmers Corp. Prod. Liab. Trust, 95
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Cal. App. 4th 1182, 1188 (Cal. Ct. App. 2002.) Successor liability is an equitable doctrine that
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allows liability to flow from one corporation to another corporation. Cleveland v. Johnson, 209 Cal.
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App. 4th 1315, 1327, 1330 (Cal Ct. App. 2012). In California, a purchaser does not assume the
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seller’s liabilities unless “(1) there is an express or implied agreement of assumption; (2) the
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transaction amounts to a consolidation or merger of the two corporations; (3) the purchasing
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corporation is a mere continuation of the seller; or (4) the transfer of assets to the purchaser is for the
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fraudulent purpose of escaping liability for the seller’s debts.” Id. ¶ 1327. Because the doctrine
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shifts liability, it is “not a separate claim” but rather “requires an underlying cause of action and
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United States District Court
For the Northern District of California
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merely extends the liability on that cause of action to a corporation that would not otherwise be
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liable.” Brown Bark III, L.P. v. Haver, 219 Cal. App. 4th 809, 822-23 (Cal. Ct. App. 2013).
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Plaintiff does not assert successor liability under the express or implied agreement or merger
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theories but instead focuses on continuation. Under the “continuation theory” of successor liability,
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“corporations cannot escape liability by a mere change of name or a shift in assets when and where
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it is shown that the new corporation is, in reality, but a continuation of the old.” Cleveland, 209 Cal.
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App. 4th at 1327 (quoting Blank v. Olcovich Shoe Corp., 20 Cal. App. 2d 456, 461 (Cal. Ct. App.
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1937)). Successor liability based on “mere continuation” requires one or both of: “(1) no adequate
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consideration was given for the predecessor corporation’s assets and made available for meeting the
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claims of its unsecured creditors; and (2) one or more persons were officers, directors, or
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stockholders of both corporations.” Cleveland, 209 Cal. App. 4th at 1327 (quoting Ray v. Alad
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Corp., 19 Cal. 3d 22, 29 (Cal. 1977)). “The crucial factor in determining whether a corporate
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acquisition constitutes either a de facto merger or a mere continuation is the same: whether adequate
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cash consideration was paid for the predecessor corporation’s assets.” Franklin v. Usx Corp., 87
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Cal. App. 4th 615, 625 (Cal. Ct. App. 2001).
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In dismissing Plaintiff’s successor liability allegations in the FAC, the Court found
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insufficient Plaintiff’s allegations that the Harris Defendants hired some of Innoprise’s employees
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and that Harward became a vice president for the Harris Defendants.” (Dkt. 77 at 18.) The Court
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also pointed out that Plaintiff did not allege that the $3.7 million price which the Harris Defendants
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paid for Innoprise’s assets was inadequate to satisfy Innoprise’s creditors. According to the FAC,
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the diversion of this payment away from Innoprise caused the shortfall. The Court did not dismiss
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the successor liability allegations with prejudice, however, because at the hearing, Plaintiff’s counsel
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asserted that additional, unpled facts supported successor liability.
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Plaintiff’s new allegations in the SAC do not sufficiently support Plaintiff’s successor
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liability theory to avoid dismissal. Plaintiff’s general allegation that the Harris Defendants operated
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the business of Innoprise “as a continuation of the business as previously operated as Innoprise”
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adds nothing substantive to his previous allegations. (SAC ¶ 48.) Although Plaintiff now alleges
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conclusorily that the Harris Defendants “continued the business under the same name only changing
United States District Court
For the Northern District of California
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the payee on the contracts,” “advertises on the internet as “Innoprise” in seeking employees then
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referring them to Harris,” and issued a press release stating that Innoprise employees will work for a
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new subsidiary and “Innoprise will continue to sell, develop, enhance, support and serve the
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Innoprise flagship solutions,” these allegations do not correspond to the elements of “continuation”
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successor liability. As in the SAC, Plaintiff alleges that Dennis Harward became an employee and
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officer of the Harris Defendants. (SAC ¶ 63.) The Court has already determined that this fact is not
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enough to overcome the general rule that successors are not liable. Moreover, Plaintiff has still not
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adequately explained how the price that the Harris Defendants paid for Innoprise’s assets is
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inadequate consideration with respect to Innoprise’s creditors. Although Plaintiff alleges that
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Innoprise’s assets were actually worth much more, he does not allege that the payment would not
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cover creditors’ claims. Rather, he continues to focus on the alleged diversion of this amount from
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Innoprise to Harward Investments. (SAC ¶ 59 (“The transfer of the purchase money in the
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transaction to Harward Investments . . . was fraudulent as to creditors in that it was for an amount
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which was insufficient to pay all unsecured creditors.”); ¶ 60 (noting that Defendants made the
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payment of the purchase money to a third party or parties with no relationship to the creditors of
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Innoprise and “[t]hus, the transfer of assets to Harris was fraudulent”).) The Court has already twice
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rejected the argument that the Harris Defendants are responsible for that diversion.
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Plaintiff also fails adequately to allege successor liability on the basis of a fraudulent
transfer. Plaintiff does not explain how his new allegations support successor liability under this
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theory, and Plaintiff acknowledged in his opposition to the sanctions motion that he does not allege
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fraudulent transfer against the Harris Defendants in the SAC. Consequently, the Court dismisses
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Plaintiff’s breach of employment agreement claim against the Harris Defendants, and any other
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claim against them based on successor liability, with prejudice. The Court will not require Plaintiff
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to file an new complaint at this time, but clarifies that Plaintiff’s only claims against the Harris
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Defendants going forward are limited claims for quantum meruit and fraud, as described in the
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Court’s prior order. (Dkt. 77.)
C.
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The Harris Defendants argue that sanctions are warranted under 28 U.S.C. § 1927 and the
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United States District Court
For the Northern District of California
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Sanctions
Court’s inherent authority because Plaintiff realleged breach of employment agreement, breach of
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contract, and fraudulent transfer in the SAC despite the Court dismissing these claims from the FAC
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without leave to amend. Plaintiff counters that the SAC does not contain claims for breach of
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contract and breach of employment agreement against the Harris Defendants and that the Court’s
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order permitted him leave to amend his with respect to successor liability, which is the basis for
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Plaintiff’s breach of employment agreement claim against the Harris Defendants.
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The Court denies the Harris Defendants’ motion for sanctions. The Court previously
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“dismiss[ed] any claims brought against the Harris Defendants under the theory of successor liability
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but [did] so with leave to amend.” (Dkt. 77 at 19.) Plaintiff therefore did not violate the Court’s
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order by alleging in the SAC that the Harris Defendants were liable for breach of employment
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agreement as successors in interest to Innoprise.
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IT IS SO ORDERED.
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Dated: February 21, 2014
ELIZABETH D. LAPORTE
United States Chief Magistrate Judge
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